'Tax collection not on par with economic growth' | Daily News


'Tax collection not on par with economic growth'

Governments are elected on the basis of promises, but no government can run on promissory notes, said former Indian Finance Minister, Palaniappan Chidambaram delivering the CA Sri Lanka's 20th Annual Tax Oration yesterday.

"Government needs money in cash. Government needs money for its expenditure which includes both consumption and investment."

He said that there are only five types of resources for a government. He identified them as print money, borrow money, invite capital investments, gains from investments made in the past and tax revenues.

"A sovereign government loves taxes because it can levy taxes. Tax resources are usually free resources without the burden of any obligation. Hence governments prefer to raise resources through taxation. Locating the power to tax is the simplest of the steps."

"What to tax, whom to tax, when to tax, the rate of tax, and how to collect the tax are the difficult steps."

Developing countries face the difficult problem of tax base.

"I am informed that the tax to GDP ratio of Sri Lanka is about 16% and the worry is it has been declining since 1990. In most years, actual revenue collections were lower than the budget estimates." The Asian Development Bank's Development Outlook 2013 mentions that the main cause of your low tax ratio has been VAT.

"VAT collections have declined from 5.8% of GDP in 2004 to 2.7 percent of GDP in 2012. It is believed that VAT collections have continued to decline because of exemptions, poor import performance since 2009, and unification of rates at 12 percent in 2011".

"Tax buoyancy in Sri Lanka has been estimated to be about 0.78% in the five year period till 2013, meaning that tax collection has not been responsive to the pace of economic growth."

"A finance minister's prime worry is how to protect the tax base and grow it. The challenges are both domestic and external."

"No economy can be insulated from what is happening around the world, especially in the United States and China. The financial crisis that hit the US in September 2008 scarred all countries. The unconventional remedy of Quantitative Easing adopted by the US caused a rush of money into developing countries."

"The opposite happened at the hint of withdrawal from Quantitative Easing. There was an outflow of money, and the exchange rates of many currencies were affected."

"Even as they are coping with the after-effects of the US' actions, developing countries are now faced with a slowing of growth of the world's economy caused mainly by the sharp slowdown in China."

"Corporate taxes constitute a major chunk of the tax revenues earned by a country. Because of their size and scale they are able to locate themselves in multiple jurisdictions."

"Our experience shows that simple and clearly-worded tax laws, moderate rates of taxes, low compliance costs, a non-adversarial tax administration, and a fair and impartial dispute resolution mechanism will enlarge the tax base and boost revenue collection."

"A non-adversarial tax administration is the taxpayer's dream, but that will require a massive effort to educate, re-train and motivate both the tax collector and the tax payer. Fair and quick dispute resolution is easier said than done, and that goal cannot be achieved unless we overhaul the entire adjudicatory system starting from the tax payer at the bottom to the judge at the top of the system."

"I am told that Sri Lanka has signed 24 such treaties beginning with the first treaty in 1980. While the intent is clear, there is a growing body of evidence that has called into question the effectiveness of offering tax incentives to promote investment including, in particular, tax holidays and tax free zones. Such incentives are not an alternative to a poor investment climate and may actually damage a developing country's tax base. The real drivers of investment are infrastructure, education and security." 

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